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Kazakhstan's Foreign Investment Law Changes Again

A little over a month ago, Kazakhstan’s President Nursultan Nazarbaev signed amendments passed several weeks previously by the Majilis (parliament) to the law “On the Subsurface and Subsurface Use” that would allow the government to amend or annul natural-resource contracts if these are judged to threaten the country’s national security. This dispute indicates the changing nature of Kazakhstan’s energy sector.


On August 27, the Kazakhstani government, citing increasing costs and delays in the implementation of production plans as well as violations of ecological legislation, suspended for three months the work of the Agip KCO consortium, led by the Italian energy company Eni, at the offshore Kashagan oil field. Kashagan is the largest oil field discovered in the world in over three decades, and current estimates of recoverable oil are around 13 billion barrels. The oil companies now project that costs originally estimated at US$27 billion will more than double to US$60 billion; the Kazakhstani government suggests that the ultimate costs will be more than double that new estimate and reach US$136 billion.

At the end of September, the country’s parliament approved amendments to legislation on subsoil resources that would allow the government to revise and even to annul contracts with foreign investors. Nazarbaev did not sign them at the time. At the end of the first week of October, Italy’s Prime Minister Romano Prodi visited the capital Astana to meet with him, afterwards expressing confidence that some manner of compensation for production delays and cost overruns would be agreed. After Prodi’s return to Italy, it became generally understood that Kazakhstan would accept, as compensation, an increase in the 8.33 per cent share of the international consortium held by the state oil company KazMunaiGaz (KMG), which, it hinted, could also become co-operator of the project.

Negotiations proceeded in view of an October 22 deadline set by the government. Just before this deadline, the consortium agreed in principle to increase KMG’s share, without suggesting publicly from which other members this increased share might be taken. According to one report, the Kazakhstan government rejected consortium member ExxonMobil’s counter-demand that, in return, the Kashagan contract be extended beyond 2041. Then at the end of the month, news reports emerged saying that an unnamed member of the consortium had objected to the redistribution in favor of KMG.

A few days later, in early November, Nazarbaev signed the amendments to the Law on the Subsurface and Subsurface Use that the Majilis had approved in late August. Nazarbaev signed the amendments only after the first round of negotiations over Kashagan, ending in early November, failed to reach a positive conclusion. A second round has since followed.

As of mid-December, the situation is still unresolved, despite earlier optimism by the Western oilmen involved, that a resolution would be reached by the end of the year. A joint memorandum with the government, signed in early December, had set the 20th of the month as the deadline for agreeing terms. On December 7, Nazarbaev publicly stated that Kazakhstan was not seeking to have KMG replace Eni as consortium operator. However, he pointedly did not rule out KMG becoming a joint operator with Eni, stating rather that the desideratum was either monetary compensation for delays and cost overruns “or an increased stake in the consortium”: which does not rule out KMG becoming a joint operator with Eni.


It is possible to outline several phases in Kazakhstani legislation on subsurface use. The first, an initial period of legislative development, began with the declaration of sovereignty in 1990 and lasted until 1996. The 1995 Petroleum Law and 1996 Subsurface and Subsurface Use Law marked the beginning of the second phase, which lasted until 1999. That year saw significant amendments to these two laws, marking the start of the third phase, which lasted until the 2005 Law on Production Sharing Agreements. The third phase also saw the development of model contracts, a new Law on Investment in 2003, and amendment of the Tax Code coverage of production sharing agreements (PSAs). The 2005 Law on PSAs, which gives special attention to offshore petroleum deposits, may be considered to have inaugurated a fourth phase of legislation, foreshadowed by changes in 2004 in the investment tax regime and complemented in 2006 by a new Environmental Code.

Western observers are of the opinion that the consortium could proceed to arbitration if it really wished to do so, although its Western industrial leaders have consistently maintained that they expect this to be unnecessary. On the other hand, in early October the Kazakhstani energy minister warned the consortium that it would face arbitration unless it agreed to the revised contract. This seeming paradox highlights a significant ambiguity in Kazakhstani legislation and legal procedure. The January 2003 Law on Investment states that investment disputes may be settled by negotiation, in Kazakhstani courts, or through international arbitration. However, it does not provide clear mechanisms for access to international arbitration or choice among venues.

Possible judicial instances of review include the International Center for the Settlement of Investment Disputes, any tribunal applying the United Nations Commission on International Trade Law Arbitration rules, the London Court of International Arbitration, and the Stockholm Chamber of Commerce, as well as the Arbitration Commission at the Kazakhstan Chamber of Commerce. Moreover, although Kazakhstan ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1995, judicial review of international arbitral awards by Kazakhstani courts is not unknown. Indeed, the application of the December 2004 Law on International Arbitration appears to give broad authority for judicial review of such arbitral awards in Kazakhstan.


Kazakhstan’s financial and banking system is the most reformed of any Central Asian or South Caucasus country. Until very recently, the country has had an excellent reputation for relative stability of the business environment. However, Nazarbaev’s decision to sign the amendments passed several months ago is causing Western observers to wonder whether Kazakhstan intends to go down the same road that Russia has taken, hardening its dealings with international energy companies. His actions threaten investor confidence and continuing flows of foreign direct investment. In the Kashagan case, outright expropriation is unlikely for the simple reason that the development is so challenging that virtually no other international firms have access to or experience with the necessary technology, and the few that may are unlikely to step in.

The record price of oil today, along with Kazakhstan’s relatively favorable past track record, makes it unlikely that Western investors will flee the country. New ones, however, may tread lightly, wondering whether Kazakhstan is planning a Russian-style “resource nationalism.” Probably the Kazakhstani leadership does not itself know the answer to this question, and will proceed on a case by case basis. In the past, Western energy companies have been able win challenges against fines and penalties within the domestic Kazakhstani judicial system. The law and the precedent have now changed, however. A basic divergence of view has arisen. Western investors feel that the playing field has been tilted against them, while Kazakhstani actors feel that it has only been leveled.

The fines imposed by the Kazakhstani government against the operators of the Tengiz oil field for violating ecological legislation, announced at the time when the differences over Kashagan became public, reflect such a divergence of opinion. The “sulfur mountains” (extracted from the oil before it is put into a pipeline) have been a bone of contention since the mid-1990s. Watching the recent Russian experience has undoubtedly given the Kazakhstani leadership more confidence to be bold in such matters. Still, the new amendments do not appear to have been adopted as part of a program of radical nationalization as seen recently in Venezuela.

Copyright © Robert M. Cutler unless otherwise noted.
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URL:  http://www.robertcutler.org/blog/2007/12/kazakhstans_foreign_investment.html
First published in Central Asia – Caucasus Analyst, vol. 9, no. 24 (12 December 2007): 7–8.

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